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Keller and Heckman LLP Victory for the Right to be Smoke-Free Coalition and E-Vapor Industry in Indiana

Date: Feb 03, 2017

The U.S. Seventh Circuit Court of Appeals ruled in favor of the Right to be Smoke-Free Coalitionholding that portions of Indiana's E-Liquid Law are unconstitutional as applied to out-of-state manufacturers

On January 30, 2017, the U.S. Court of Appeals for the Seventh Circuit issued its decision in Legato Vapors LLC et al. v. David Cook et al., No. 16-3071, striking as unconstitutional portions of Indiana's Vapor Pens and E-Liquid Act (the Act) as it applies to out-of-state manufacturers.

Among other things, the Act prohibited the sale of "unpermitted" e-liquid products used in refillable open-system e-vapor devices starting June 30, 2016. Actually obtaining a manufacturing permit from the Indiana Alcohol and Tobacco Commission (ATC), however, was effectively impossible for out-of-state companies for several reasons; most critically, e-liquid manufacturers were required to (1) build facilities compliant with the Indiana Commercial Kitchen Code and (2) contract with a qualified third-party security firm to provide certain specific services (such as 24/7 video surveillance). For a security firm to qualify under the law, however, it must have a certified Rolling Steel Fire Door Technician and an Architectural Hardware Consultant under its employ - certifications not common in the security industry. Moreover, those certified employees had to be hired by July 2015, preventing future security companies from ever being able to comply. Indeed, the ATC determined that only one security firm in the country, located in Lafayette, Indiana, qualified under the law.

In September 2015, the Right to be Smoke-Free Coalition (the Coalition), a trade association of e-vapor companies represented by Keller and Heckman Partners Eric Gotting and Azim Chowdhury, intervened in a lawsuit challenging the Act. Among other things, the Coalition argued that the Act violated the dormant Commerce Clause of the United States Constitution, which prohibits extraterritorial legislation, by regulating e-liquid manufacturing activities that occur completely outside of Indiana. After their motions for preliminary injunction and summary judgment were denied by the Southern District of Indiana, the Coalition and co-petitioners Legato Vapors LLC et al. appealed to the Seventh Circuit. Oral arguments were heard in Chicago on December 8, 2016 and the decision issued on January 30, 2017.

Ruling in the Coalition's favor, the appellate Court declared that the "unprecedented" application of the Act's security provisions, clean room (kitchen code) requirements, and audit provisions as they relate to facility design and production processes to out-of-state manufacturers was clearly extraterritorial and a violation of the dormant Commerce Clause. Indeed, the Court stated that "with almost two hundred years of precedents to consider, our review of prior dormant Commerce Clause decisions has not revealed a single appellate case permitting any direct regulation of out-of-state manufacturing processes and facilities comparable to the Indiana Act." The Court also noted that the Act directly regulates production facilities and processes of out-of-state manufacturers and "thus wholly out-of-state transactions." It also "poses the clear risk of multiple and inconsistent regulations that would unduly burden interstate commerce."

The Circuit Court reversed the district court's grant of summary judgment to Indiana and remanded the case to the district court to declare the challenged provisions unenforceable against out-of-state manufacturers and to enjoin their enforcement against the Coalition and co-petitioners.